IN THE past three weeks, Bendigo and Adelaide Bank gave its community banking model a rev-up by issuing three prospectuses to fund three new community bank branches.

This follows 22 new community bank branches opening last year, and 20 the year before.

But questions are emerging about the share price and operational performance of the community banks, and more bluntly, just who are their biggest beneficiaries - Bendigo and Adelaide Bank (Bendigo), or the many thousands of investors who have sunk more than $100 million into more than 259 community bank branches in the past 12 years and received little in the way of dividends?

However, Bendigo has advised that $40.3 million has been paid by these banks to local communities and 1152 jobs have been created.

This is how the model works: community banks operate under a franchise arrangement, with the local community owning and operating a branch, and Bendigo provides the infrastructure and support.

The community bank and Bendigo split the branch revenue about 50-50 and the community bank pays 100 per cent of the expenses, including an annual franchise fee.

Bendigo doesn't separate the earnings of the community banks, the number of loans it has made to them, or how much it has made from them.

But a retired auditor, shoe retailer and a former mayor of Essendon, John Williams, has studied the performance of the franchises of 77 branches to ascertain the true state of affairs.

According to his findings, at least 55 community banks of the 77 he studied lost money in the 2009 financial year, 17 have spent all of their equity capital from the period they started to June 30, 2009, and at least 58 had a negative cash flow in that year.

Bendigo could not provide BusinessDay with the total equity raised, total equity lost, profits, losses, revenue or cashflows or equity for the 259 community banks on the basis "it would be illegal for us to disclose information about them without their consent".

Taking an ultra-conservative position that Williams picked the worst 77 community branches to monitor, and that the other 182 are doing well, it still adds up to almost 7 per cent of Bendigo's community banks classified as basket cases.

These so-called basket cases were continuing to operate with bank loans and overdrafts from Bendigo because Bendigo believes they will ultimately be success stories. These include the Homebush, NSW, franchise, which opened in 2002, spent all its capital, and had negative equity of $469,922, at June 30 last year, a loss of $81,096, and negative cash flow of $59,793. It would be an impressive turnaround if it did happen. Others include: Edenhope, Victoria, which opened in 2003 and had negative equity of $163,738 at June 30 last year and negative cash flow of $108,192 for the 2009 financial year; Robe, South Australia, which opened in 2003, had $333,386 negative equity at June 30 last year and $58,614 negative cash flow; Narrandera, NSW, which opened in 2004 and had negative equity of $149,509 at June 30 last year and negative cash flow of $62,752; and Augusta (Margaret River), Western Australia, which opened in 2005 and had negative equity of $162,928 at June 30 last year and negative cash flow of $64,512.

Bendigo says that the banks' initial capital raisings are supposed to be sufficient to allow for three years of losses from the start of operations. It looks like many need a good deal more patience. Just as well Bendigo has that patience. Or is it just throwing good money after bad?

While there might be issues about the performance of some community banks, if a community branch did cease to operate, customers' deposits are safe and would be protected by Bendigo because they are held directly on the Bendigo & Adelaide Bank balance sheet, not to mention the government guarantee for those under $1 million.

But it isn't a question of the safety of the deposits; it is more about their performance from an investor's perspective.

And the issues don't stop with the community banks. Bendigo has been the beneficiary of funding from the Australian Government's Office of Financial Management (AOFM). Brett Le Mesurier of Axiome Equities points out that on July 8, Bendigo announced that the AOFM had subscribed to $476.5 million in 5.8 year class A4 notes in Bendigo's $1.5 billion RMBS TORRENS series transaction.

The total size of the class A4 notes issued were $477.5 million so it seems there was little demand from private investors, unlike the other three tranches, which had strong private support.

Le Mesurier says he can't be sure why the AOFM found the A4 notes to be such an attractive investment when the private sector did not. He says the AOFM bought 24 times more of the class A4 notes than it did the shorter duration three-year class A3 notes, while the margin Bendigo paid on both notes was the same.

Bendigo says that this is just a normal commercial transaction and can't answer for the AOFM, but it's not complaining.

So Bendigo's issues are quite simple: the losses incurred by a number of community banks, the challenges this presents for growth, and the availability and price of funding. When all this is wrapped together, it pushes the bank to focus more and more on reducing expenses. This makes the growth story harder to find and even harder to tell.